CAK’s Sh15 billion demand blocks Diageo’s EABL sale

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The Competition Authority of Kenya (CAK) is demanding that East Africa Breweries Limited (EABL) establish a Sh15.5 billion reserve fund before approving Diageo’s sale of 65 percent stake in the brewer, forcing a stalemate in the Sh388.2 billion deal.

The competition watchdog wants EABL to establish a dedicated reserve equivalent to four percent of the transaction value that Japan's Asahi Holdings will pay Diageo for liabilities that will crystallise after the deal.

This has triggered protest from EABL and Asahi, who have accused the CAK of assuming powers of the court, multiple people familiar with the stalemate told the Business Daily.

The money would be ring-fenced and used to settle or resolve claims, disputes, liabilities and other legal or regulatory challenges involving third parties, the CAK told the National Assembly’s Finance Committee.

The CAK also wants the merged entity to reserve at least 20 percent of refrigeration space issued to retail outlets for non-EABL or Asahi-branded products, a condition the competition watchdog said is intended to prevent the combined business from using its distribution network and company-owned equipment to shut out competing brands.

The two transacting parties have rejected the conditions, arguing that the proposed remedies are unprecedented, unprocedural and have no legal mandate.

The dispute has stalled the transaction, nearly a year after Diageo and Asahi announced the proposed sale, with the deal having secured regulatory approvals in the other East African markets where EABL operates.

Besides Kenya, EABL also has operations in Uganda through Uganda Breweries Limited (UBL) and in Tanzania through Serengeti Breweries Limited (SBL).

In a memorandum to Parliament’s Finance Committee, the CAK said its review had identified competition and public interest concerns that could be addressed through behavioural and remedies rather than by blocking the transaction.

The authority said Asahi, although it does not currently operate in Kenya, is a credible potential entrant into the Kenyan alcoholic beverages sector.

It found that the merged entity would continue to benefit from EABL’s extensive distribution network, branding arrangements, exclusive sales territories, product-placement arrangements and company-owned refrigeration equipment.

The CAK said these features had the potential to reinforce the merged entity’s market position, foreclose competing manufacturers from key retail outlets, increase barriers to entry and expansion, and reduce future rivalry in already concentrated markets.

The refrigeration condition is aimed at ensuring competing manufacturers retain access to retail outlets.

The CAK proposed that at least 20 percent of refrigeration space issued to outlets be reserved for non-EABL or Asahi-branded products.

The authority excluded top-end drinking establishments, supermarkets, petrol stations, liquor stores and hotels above two stars.

The CAK also raised public-interest concerns arising from ongoing court proceedings and regulatory matters involving micro, small and medium enterprises and other third parties with commercial relationships with EABL. Among the matters cited was a claim by Bia Tosha Distributors of approximately Sh8 billion, arising from alleged loss of profits following termination of its distributorship.

The authority also cited JILK Construction’s claim of approximately Sh2.45 billion relating to the Kisumu brewery project, as well as complaints by distributors alleging abuse of dominance by EABL.

The CAK said the financial reserve was intended to address these claims and anticipated settlement obligations. Its initial proposal required EABL to establish a reserve equivalent to at least 10 percent of the transaction consideration.

The authority later reduced the requirement to four percent after further review, saying this reflected the aggregate value of identified claims and anticipated settlement obligations.

“The target undertaking (EABL), before completion of the transaction, establish and maintain a dedicated financial reserve equivalent to or not less than 10 percent of the total transaction consideration, which reserve shall be ring-fenced and applied solely towards settlement or resolution of any third-party claims, disputes, proceedings, liabilities, regulatory actions, or challenges arising directly or indirectly from the transaction,” said CAK Director-General David Kemei in the memorandum.

Diageo and Asahi have challenged the requirement, saying a condition requiring the reservation of money to protect against litigation matters is unprecedented and unprocedural.

The companies argue that EABL is a going concern and highly profitable, as demonstrated by its latest full-year results, and that it has never failed to meet any of its legal obligations in its 104-year history.

They further argue that similar conditions have not been imposed on other transactions in recent years that were approved without conditions by the CAK or other antitrust bodies, including the Common Market for Eastern and Southern Africa (Comesa) and the East African Community (EAC).

The companies reckon that the CAK has no legal mandate to impose the conditions. They say the claimants did not have access to the ring-fenced money before the proposed transaction and should not acquire such a benefit merely because EABL’s ownership is changing.

On Bia Tosha, the parties argue that courts have already rejected the distributor’s request to have Sh8 billion set aside in its dispute with EABL.

They contend that revisiting the matter through merger conditions would amount to litigating the case afresh. On JILK, they say the matter remains before the courts and that the judge is expected to determine the company’s request to have about Sh3 billion set aside in relation to its dispute with EABL.

The parties argue that the CAK’s intervention risks interfering with matters before the High Court.

They also say the regulator’s position is inconsistent because it appeared in JILK’s case as an interested party and opposed the company’s interim orders seeking to stop the transaction pending determination of its dispute with Kenya Breweries Limited (KBL).

Diageo and Asahi also reject the refrigeration condition, arguing that EABL is a going concern and that market conditions will not change simply because its shareholder is changing.

They say the companies that actually trade in Kenya are KBL and UDV Kenya and argue that the listed EABL should not be subjected to conditions based on market circumstances that are expected to change.

The CAK, however, maintains that its assessment considered the likely effects of the transaction on consumers, employees, suppliers, distributors, local manufacturers, minority shareholders and other stakeholders.

The authority says it consulted market participants and considered ongoing disputes and regulatory matters before proposing the remedies.

The regulator has now sought an advisory opinion from the Attorney-General on the legal scope of its merger review powers.

Japan's Asahi has been hunting for opportunities in markets including Africa and South America as it looks to expand globally. The Japanese firm said EABL offers an unrivalled portfolio of brands, marketing capabilities and production facilities.

Reporting originally appeared via Business Daily. Read the full source for additional context.